Compass Directions Morning Report Tuesday, 22 November 2011

The US “Supercommittee” that was designed to overcome Congressional deadlock in Washington over the planned $1.2 trillion deficit reduction measures has failed. The inability of Republican and Democrat members to propose a plan by the November 23rd deadline will automatically trigger across the board budget cuts starting in 2013. The question for investors now is will history repeat itself and see the Americans come through with an agreement at the 11th hour? For once, the mar-kets were not focussed exclusively on the situation in Europe but the result was the same. Markets dived. Surprisingly, the EUR is held up remarkably well just below 1.3500.

In Europe, Spain’s Mariano Rajoy won the biggest parliamentary majority in almost 3 decades and told his countrymen that they should brace themselves for difficult times ahead as the nation faces a financial crisis that threatens to take it down the path of Greece, Portugal and Ireland. In a sign that the US will remain the world’s reserve currency for some time to come, foreign bank reserves at the Federal Reserve have more than doubled since the end of 2010 to $715 billion from $350 bil-lion. Furthermore, according to the Bloomberg Correlation Weighted Currency Indexes, the USD has appreciated more than 7% after the country had its credit rating cut in August. The AUD continues its decline opening this morning just below 0.9840 after trading perilously close to 0.9800.

Equity markets plummeted as Goldman Sach called the S&P500 to 1,100 if the supercommittee fails to reach a deal. The index closed down 1.86% to 1,193. 483 of the 500 stocks listed on the index fell as investors grew fearful of the impact that automatic budget cuts and significant fallout from Europe would have on the US economy. Earlier in Europe, markets were pounded as Moody’s released a report that France’s rising financing costs would place more pressure on the nation’s chal-lenging fiscal environment and Germany’s Finance Ministry announced that it expected growth to be “noticeably slower” this quarter. The DAX fell over 3.3% to 5,606 while the FTSE lost 2.62% to 5,222.

Debt problems on both sides of the Atlantic conspired to weaken commodity prices across the board. WTI crude continues to slide from its highs above $103.00 last week to trade as low as $95.25 last night. Precious metals were particularly hard hit as the USD strengthened across the board. Gold fell almost 3% to $1,676 whle silver suffered falls of 3.3% to $31.40. Soft commodities were broadly lower with cotton and soybean down 3% while copper slid 2.85%. The CRB index is lower by 3.4 points to 308.81. Another data light day with only NZ inflation expectations to be released. Overnight, the release of US existing home sales at 4.97 million was marginally lower than median expectations.

GOLD moved firmly lower in offshore trade as USD strength and equities selling saw commodities sold off across the board on the back of a failed Supper Committee meeting in the US and the potential for further downgrades in the European region and ultimately the US. Recession fears are rising and a break up of the Euro is looking more and more likely. Cold finished US trade weaker by 2.70% at $1,678. Commodity prices are suffering across the board right now as the global economy takes a turn for the worse and as the USD sees big gains we may see further selling pressure in the short-term for precious metals. We have to remain sidelined for now after a close below $1,690/95 support but we remain MT bulls as fundamentals still point to higher prices and major long-term trend support down at $1,580/$1,600 continues to hold. A close below here and there are big problems in the precious metals space and we would exit our longs. Intra Asia today if we can regain the $1,690/95 level this would be a good sign and we could start a grind higher back towards 41,750 which now acts as major resistance. Support towards $1,665 should hold today in Asia but below $1,650 and we are well on the way back to $1,600. This could be a false break of ST support so remain sidelined for now and await a break higher.

AUD/USD has finally taken the stairs lower during the European morning as the negative tone left over from the Asia session was enough to get the bears going once the price broke below the 0.9940 support. Negative US and European headlines and the bond markets again trading weaker with the assistance of the ECB needed to fill the gaps has seen risk off trading with the commodity and commodity related currencies being effected most. Buying ahead of 0.9800 has stopped the decline with the bounce seen in the Euro most likely saving the day for the AUD. Since the bottom the pair has hung around the level with small bounces limited to 0.9875 as caught longs bail on rallies. There is a lack of Asia zone data with Australia having none which should ensure the AUD remains offered today. Also helping the bears will be the news wires talking about the state of the US economy and the effects the super committee will have if they continue to be unable to find spending cuts. Below 0.9800 will be the interbank markets target whilst the pair remains heavy.

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